Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings of United Services Automobile Association (USAA) and its insurance subsidiaries at 'AAA'.
In a release on January 18, Fitch noted that additionally, it has affirmed the Issuer Default Rating (IDR) of USAA Capital Corp. (USAA CapCo) at 'AAA' and its senior unsecured notes at 'AA+'.
USAA's ratings reflect its strong competitive position in a stable niche market providing insurance and other financial products to military and ex-military personnel and their families. The ratings also reflect USAA's exceptionally strong capitalization, solid liquidity, continued disciplined underwriting, and historically low financial leverage. Offsetting factors include the company's catastrophe risk and the lower credit profile of its banking operation.
Through September 30 2012, USAA generated surplus growth of $1.8 billion primarily due to strong earnings and unrealized investment gains. Fitch views the company's continued capital growth, despite significant catastrophe losses in recent years, as a pillar of strength to the rating.
In November 2012, USAA reported an initial loss estimate related to Hurricane Sandy of $143 million to $525 million. Fitch does not expect losses to exceed the high end of the range, which the agency views as in line with expectations given its market share. Still, Fitch expects full year 2012 earnings to remain strong and improved over the prior year, which experienced record catastrophe losses.
Fitch views USAA's capital position as exceptionally strong based on its 838 percent NAIC risk-based capital (RBC) ratio and 'extremely strong' score on Fitch's Prism economic capital model at year-end 2011. Additionally, the company maintains conservative statutory net leverage (measured by net written premiums and liabilities to surplus) at approximately 1.4x, which exposes less of its surplus to pricing and reserve risk as compared with peers. Fitch expects capital strength to remain solid at year-end 2012.
USAA utilizes a relatively prudent investment strategy with virtually no exposure to below-investment-grade fixed income securities or direct sovereign exposure, and modest exposure to equities. However, USAA has sizeable exposure to structured securities, largely CMBS and ABS, comprising approximately 20 percent of its investment portfolio. This is somewhat mitigated by the high credit quality and seniority of the tranches.
USAA's financial leverage is expected to remain low at year-end 2012 with a debt to capital ratio below 4 percent and a total financing & commitments (TFC) ratio, a comprehensive measure of all financing activities including both recourse and non-recourse securitizations, near prior year levels of 0.12x. Interest coverage is also expected to remain strong and improved over prior year levels due to greater earnings expectations.
Investments in illiquid subsidiaries represent approximately 40 percent of USAA's surplus. USAA CapCo., which owns USAA FSB and USAA Real Estate Company, is the largest subsidiary. Significant growth in the banking operation and/or real estate company would alter USAA's operating profile and could promote negative rating pressure. Fitch notes that USAA has a support agreement with USAA CapCo that requires USAA to maintain CapCo's net worth at not less than $1 million and to retain ownership of 100 percent of CapCo's common stock.
Fitch continues to view the asset quality of USAA FSB favorably when compared to banking peers. Fitch views the bank's capitalization as adequate with a Tier 1 risk-based capital ratio of 12.9 percent as of September 30.
Fitch views the strategic category of USAA Life Insurance Company as 'Core' and, as a result, it continues to receive upward lift to the USAA group rating level. This reflects Fitch's view of the complementary nature of USAA's life products to its distribution channel.
Key rating triggers that could lead to a downgrade include:
--A material deterioration in balance sheet strength, including net statutory leverage - defined as net written premiums and liabilities divided by surplus -above 2.0x for property/casualty operations and 2.7x excluding surplus for affiliated life insurance subsidiaries and USAA Capital Corp.;
--Sharp and sustained weakening of underwriting results;
--TFC ratio at or above 0.4x;
--Significant growth in the banking operation would alter USAA's operating profile and could promote negative rating pressure.
Fitch has affirmed the following ratings with a Stable Outlook:
USAA Capital Corp.
--IDR at 'AAA';
--Short-term IDR and commercial paper at 'F1+';
--3.5 percent $200 million medium-term notes due July 17, 2014 at 'AA+';
--1.05 percent $250 million senior unsecured notes due September 30, 2014 at 'AA+';
--2.288 percent $250 million senior unsecured notes due December 13, 2016 at 'AA+'.
Primary insurance companies:
United Services Automobile Association
USAA Casualty Insurance Company
USAA General Indemnity Company
USAA County Mutual Insurance Company
USAA Texas Lloyds Co.
USAA Life Insurance Company
--IFS at 'AAA'.
Additional information is available at 'fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (January 11, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology Amended
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